Now that we have left our jobs and declared early retirement, it is time to put our drawdown strategy into action. So what does this actually look like? Specifically where is the money we live on coming each month? How long until we have to start maneuvering our IRAs? Here is the outline of how what we plan to live on prior to reaching 59.5
Disclaimer: These numbers are a combination of actual numbers and estimates. Ultimately the accuracy will be dependent on total market return, investment choices made, and our spending. This post is for informational and entertainment only and should not be considered investment advice
Stage 1: Cash Reserves, Dividends, and the Non-Qualified Plan
The first stage of our draw down strategy involves using up our cash/bond allocation in our taxable brokerage account, supplemented by current dividend payments, and the payout of my Non-Qualified Deferred Compensation Plan.
Cash: This is invested in Fidelity’s Cash Reserves and supplemented by moving it around for various savings account signup bonuses found on Doctor of Credit. I am assuming a 2% yield in this estimate, however using savings account signup bonuses is allowing me to push the actual annual yield on cash to 4%.
Non-Qualified Plan: This plan was something my employer offered similar to a non-governmental 457b. This allowed me to defer a portion of my current compensation to be paid out at a later date. These funds are invested in a mix of equities, bonds, and cash. This estimate includes this payout increasing by 4% a year based on the growth of the underlying assets.
Dividends: We own a number of individual stocks and mutual funds in our taxable brokerage account (disclosed here). These dividends currently total $14,668/year and these companies have consistently increased their payout each year. This estimate assumes dividends will increase by 4% per year. It is usually not tax efficient to carry dividend stocks in your taxable brokerage account, but under current rules these receive preferential tax treatment if you earn less than $100,000 per year. (Hooray for not working!)
|NQDC||$18,900||Interest on Cash||2.00%|
|Spending Growth||2.00%||NQDC Growth||5.00%|
|Year||Cash||Spending||Dividends||NQDC||Int on Cash||Ending Cash|
The first stage of our plan will last us just over four years. There are two potential items that could change these estimates, a home purchase or outside income. We would deplete some cash with a down payment or paying cash for a home, but our expenses would presumably go down with the elimination of rent. Provided we don’t change our spending, outside income would reduce the amount we needed to draw from our portfolio.
Stage 2: Asset Drawdown
The second stage of our early withdraw plan involves slowly depleting the assets of our taxable brokerage account. In this example, we’ve used a sample starting point of $400,000 in our portfolio and applied a 3% growth rate to the portfolio during stage 1 (since we are taking out the dividends). I have also used a 3.25% dividend rate during the asset drawdown. This is slightly below our current portfolio yield.
|Growth Rate||3.00%||Portfolio Balance in Year 5||$450,204|
|Non Qualified Growth||5.00%||Starting NQDC Payment||$22,973|
|Year||Starting Balance||Spending||Dividends||NQDC Payment||Ending Balance|
When this model is run through, our taxable brokerage plus non-qualified plan should support us for the first fifteen year! This plan will conservatively support us from year’s five through fifteen.
So what happens after Stage 2?
At the end of Stage 2, we will be 53 years old and this assumption has us depleting all of our assets outside of our retirement accounts. We have multiple options become a consideration to bridge the gap between age 53 and 59.5.
Roth IRA Contributions: Today we have low six figures in Roth IRA contributions. These contributions can be withdrawn without penalty once they have been in there for five years. We have the option of slowly creating some additional contributions through the Roth IRA conversion ladder over the next fifteen years.
HSA Distributions: We have been using an HSA account for the last ten years and have accumulated a high five figure balance. We’ve gone back and forth on savings receipts but have some money deferred and will continue to let this account save and grow. These deferred withdraws will help supplement our income during this period.
72t Equal Periodic Payments: Mrs. Shirts and I both have Rollover IRAs courtesy of our employment. These would allow us to take equal periodic payments out provided we follow the IRS guidelines for a distribution rate and don’t change it until we reach 59.5. This strategy can be risky if you have a long way to go for early retirement, but I believe it becomes a reasonable option as you get closer to 59.5.
Pension: I can elect to receive a small pension payment at age 55. I worked in the private sector and this pension is small and doesn’t include an inflation adjustment. The best case for the pension is that inflation stays low and it supplements 15-20% of our expenses when I turn 55. There is a discount to the pension taking it early, but I’ve calculated the break even to around age 78. This isn’t a decision we have to make for eighteen more years, but today the decision would be to take the pension early. More than half of our assets are in retirement accounts and I expect the income will be more valuable to us prior to age 59.5 than afterwards.
So all these spreadsheets are nice, but what does reality look like:
1) Income Post Retirement: I’ve had months to reflect on my career and there was a portion of the work that I enjoyed. The problem is this work came with lots of other requirements like being in the office or available for 50-60 hours a week and complying with management’s whims. If I could earn 20-25% of what I previously earned by doing direct consulting work on the client side it would fully cover our annual expenses. Call the internet retirement police on me if you want, but I am not opposed to doing things I find fun and can earn some money.
I also enjoy writing on this blog and interacting with readers. If/when this has the readership necessary to monetize it, I will spend the money to improve the blog and recover those costs and hopefully some profit through a non-annoying level of ads and affiliate links.
2) Market Returns: We have designed our spending to be below a 4% safe withdraw rate. This means the likelihood of success is more than 95%. That success rate means there’s an 85% – 90% chance we end up with far more money than we need. In a capitalist market, companies must earn a rate of return significantly higher than a treasury bond or an FDIC insured savings account to justify holding an investor’s capital. We have setup an equity glide path to avoid selling during a short-term downturn and we expect to earn more than mid-single digit returns on our total portfolio over the long term. This will leave us with more money than we expected.
3) Spending Rate: We enjoy the game of saving money and optimizing expenses. Grocery shopping, credit card hacking, savings account bonuses, and trying to see how many miles we can get out of a car are all things we enjoy. I wouldn’t be surprised to see us come in lower than expected on expenses through playing this game. Now that the time pressure of work is removed, we have more capacity for optimizing our expenses.
I hope by outlining some actual numbers for a recent early retiree in their 30s, it can help others have confidence in pulling the plug on their employer. We fully funded our retirement accounts for more than a decade and then saved heavily in a taxable brokerage account. Our plan has two tools that are more rare in a pension and non-qualified plan, but these are only part of strategy for retirement income. There are no guarantees for the future, but we have designed a drawdown strategy that we are confident about trying.
Further reading: I credit three other fellow 2018/2019 early retirees for going down this path around the same time as me and providing their thoughts to the world
Physician on FIRE: Early Retirement Checklist Part One
The Retirement Manifesto: Our Retirement Drawdown Strategy
Early Retirement Now: The king of statistical analysis for Early Retirement